December 19, 2012
The Income Tax Charitable Deduction in Context
Monday's Wall Street Journal debate on the charitable deduction offered conflicting views on the extent to which tax incentives impact giving. On one hand, as Diana Aviv of the Independent Sector noted, a number of studies predict that limiting or the ending the income tax deduction will dampen charitable giving. On the other hand, as Dan Mitchell of the Cato Institue mentioned, tax benefits for giving have changed drastically over the years but giving remains relatively constant at about 2% of GDP. Unfortunately, I find it hard to form an opinion about the various proposals to limit the deduction that are floating around for two reasons.
First, we just don't know enough about the interaction of various motives for giving and which motives will "win" if the tax benefits for giving are decreased. Let's start with what we do know. It is well-established that donors of different income groups support different types of charities. Upper-income folks tend to focus on higher eduction, health organizations, and the arts. Albeit to a lesser extent, however, they also support social service organizations and religious groups (which often offer social services). Most studies also predict that limits on the deduction will impact giving by the well-off more than the less well-off. Lastly, a study from this summer suggests that giving to certain groups ("arts and culture, private education, environmental protection, animals welfare, human services, philanthropy, and private foundations") is more elastic than giving to other groups (hat tip Grace Lee). What I would like to see, however, is someone put this all together to see if we can learn anything about the elasticity of high income donors to various organizations. If giving by a given income group falls, what does that really mean? Who does that really impact? Will they cut their giving equally across the board, perhaps continuing to support the same groups as before but cutting the dollar amount each group receives by a set percentage? Or will they react differently to different donees? For example, will well-off donors keep giving to the opera because of the social status but cut donations to the Salvation Army? Or will altruism win out, and they keep donating to the Salvation Army but decrease gifts to the opera? A better sense of which charities would be impacted -- were giving to indeed drop -- would help me assess these proposals. The IU Center on Philanthropy's studies of high-net worth individuals and their motivations is a good start, but we need more specific data about how such individuals might react.
Second, most of the discussions I've seen focus on the basic aspects of the income tax charitable deduction in isolation. But as we know, a host of other tax changes are also being discussed. How might these other changes influence giving, if at all? For example, if the capital gains rate goes up, will that encourage more gifts of appreciated property? Some Florida charities think so. If so, will that counteract any potential drop from some of the proposed changes to the basic structure of the deduction? The estate tax is also in the mix, too. Although it's currently scheduled to revert to a $1 million exemption and a top rate of 55% (from its current $5 million exemption and top rate of 35%), most don't think that will happen. Lately, however, there's been a renewed push by some not to simply extend the status quo but to strike a middle ground, perhaps with a $3.5 million or even $2 million exemption level. Would a tougher estate tax, relative to today, mitigate changes to the income tax charitable deduction by encouraging donors to shift their gifts to their death?
If these studies exist and I can't find them, please correct me. And if they don't exist yet, I suppose this is a plea to the economists for help!
Miranda Perry Fleischer
December 19, 2012 | Permalink
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Miranda, thanks for this excellent overview of the open questions in the literature. You're right especially to point to the fact that there's very little real evidence on the effects of tax changes on different forms of entities. The study by the Yetmans, which you point to, is a nice first step in that direction, but because it relies on 990 data there are a lot of holes. E.g., it of course can't tell us anything about churches or other non-filers, such as state institutions and very small charities. It's also unclear how reliable the data are. For instance, I'm not sure what incentive, if any, a charity has to accurately report the value of its in-kind gifts. Given that the transaction costs of doing that are not zero, we should probably assume those numbers aren't very good.
This is not to criticize their study, just to point out how messy research in this area will be until we get more reliable sources of information.
Posted by: BDG | Dec 21, 2012 8:02:01 AM